In the past year, the company GAP has seen a steady decrease in their stock prices which has been caused by a couple of different things. A change in management and poor communication within new management has caused sales to steadily decrease. One effect of this poor communication in management is that GAP’s inventory is not well organized, which hurts the net cash flow of the company. The old system used to order inventory was “by gauging the response [to the product], the management [was] able to forecast demand properly and release an appropriate production order to vendors and suppliers…” (“Gap Inc Left”). When the old manager left, “…it was expected that others would continue to build on his good work…” (“Gap Inc Left”). However, the
…show more content…
Because of this the net cash provided to them from operating activities is lower than it could be if they let their inventory shrink a little. For example, let’s say that GAP’s net income for the year is around $200,000, and they have a depreciation expense of $10,000, a decrease in accounts receivable of $3,000, an increase of inventory of $30,000, and an increase in accounts payable of $15,000. This would leave them with net cash provided by operating activities of $198,000. Because GAP has increased their inventory by $30,000 but has only received $3,000 from accounts receivable, they are not recouping the cash spent on their inventory. Now if GAP re-implemented the old manager’s strategy of when to buy inventory, GAP could have more cash from operating activities. One way for GAP to gage when to buy more inventory could be based on how much accounts receivable goes down and then multiple that number by maybe 1.5 so they would order just a little more inventory for the next month. To show this, I will use the $3,000 decrease in accounts receivable from the previous example. So with the $3,000 decrease in accounts receivable, you should multiply 3,000 by 1.5 to get 4,500. By doing this they will only increase their inventory by $4,500 instead of the $30,000 they did before. With this little change their new net cash provided by operating activities is now $223,500. By doing this, they change the amount of net cash they receive and therefore save $25,500 that was unnecessarily being bought for
Because of this the net cash provided to them from operating activities is lower than it could be if they let their inventory shrink a little. For example, let’s say that GAP’s net income for the year is around $200,000, and they have a depreciation expense of $10,000, a decrease in accounts receivable of $3,000, an increase of inventory of $30,000, and an increase in accounts payable of $15,000. This would leave them with net cash provided by operating activities of $198,000. Because GAP has increased their inventory by $30,000 but has only received $3,000 from accounts receivable, they are not recouping the cash spent on their inventory. Now if GAP re-implemented the old manager’s strategy of when to buy inventory, GAP could have more cash from operating activities. One way for GAP to gage when to buy more inventory could be based on how much accounts receivable goes down and then multiple that number by maybe 1.5 so they would order just a little more inventory for the next month. To show this, I will use the $3,000 decrease in accounts receivable from the previous example. So with the $3,000 decrease in accounts receivable, you should multiply 3,000 by 1.5 to get 4,500. By doing this they will only increase their inventory by $4,500 instead of the $30,000 they did before. With this little change their new net cash provided by operating activities is now $223,500. By doing this, they change the amount of net cash they receive and therefore save $25,500 that was unnecessarily being bought for